This Credit Card Alternative Could Reduce Your Interest Rate by 50%

by Neal Frankle, CFP ®

There is a credit card alternative that could reduce your interest rate by 50% or more. Of course the best idea is to get out of credit card debt completely. But at the same time, you need to cut your cost of debt. If you carry high-interest credit card debt, there are options that can save you a great deal of money. One idea is to use a home equity line of credit or refinance, but if you don’t have equity, this won’t work. No worries … there is still an alternative.

Quite simply, the concept is to use peer-to-peer lending with a company like Lending Club to pay off your credit card debt. Of course, you would only do this if the rate at the peer-to-peer company is lower than the rate the credit card is charging you. But with people paying 15+% on credit card debt, it certainly pays to look into this.

How Lending Club works

Peer-to-peer lending is simply a way to connect people who have money with people who need money. The company that does this is a broker. There is no bank in the middle of the transaction so it usually results in lower fees for the borrower.

Who is this arrangement good for?

While I’d never invest money in one these deals – plenty of other people do. I don’t recommend this as an investment for people I work with because I don’t like the lack of security. But if I needed money to pay my 17% credit card interest, I’d be the first one to sign up.

How much interest will you pay?

Of course the rate you pay depends on your credit score. The higher the score, the lower the rate. But even if your credit score isn’t the best, you could still save a ton. In fact, on one P2P lending site, they say the average borrower pays about 7.89% as compared to 12% or more for credit card debt. That 4% savings is huge.

Have you looked into peer-to-peer lending to reduce your interest expenses? What was your experience? Regardless of how you solve the immediate need to pay your debts, you’ve got to get your personal budget plan together so you never run into this issue again. How are you going to do that?


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{ 7 comments… read them below or add one }

Bill April 24, 2010 at 1:30 PM

I do invest in Prosper, only ~5k, I choose to auto invest, rather than ‘pick the right loans’ if people could pick the right loans our economy would be running a little smoother. Just as you can not time the markets, you can not pick a loan based on a story + research. You have no idea what will happen next week in this person’s life. Spread your investments wide and thin and make up the mistakes in the spread.


Brandon Schmid April 24, 2010 at 9:41 AM

I have always believed in using a HELOC. I think the main thing to watch out for is that one must get control of their bad habits BEFORE they use this method.

I have found that for most people this is just a gateway to getting into more debt. If a person can manage their money than this would work out great.




Neal@Wealth Pilgrim April 23, 2010 at 2:23 PM

I can see the allure of course and I suppose if someone was very careful and they spread the money around A LOT it might be OK but it’s not my cup of tea for investing.

There are many reasons for this but it doesn’t matter. It’s not to say this is not a legit way for Peter or others to invest.

Way to go Peter!


Nunzio Bruno April 23, 2010 at 1:29 PM

Interesting spin using a P2P lending network to cover debts. I’m in agreement with you on the level of risk but if it’s the difference between paying 50% and 15% there’s not really any reason why you shouldn’t give it a shot. Seeing posts like @Peter there is great because it means that there is some validity to these things and that as long as it isn’t the staple of a personal portfolio why not lend a little extra cash to pick up 10.5%. Nice job there Pete!


Peter April 23, 2010 at 9:14 AM

I’ve got close to $800 invested with Lending Club now, and I’m earning 10.5% on my money so far, with zero defaults. I think it can be a legitimate investment as long as you go in with eyes wide open and are careful about which loans you choose.


Social Lending Network April 23, 2010 at 8:59 AM

After being on death’s door peer-to-peer lending is finally starting to live up to its initial promise. Combined, Lending Club and its rival Prosper have now raised over $100 million in capital and originated over $300 million in loans. Debt consolidation is the most common type of loan in both marketplaces as more people realize that it is a great alternative to paying off (increasingly) costly credit cards.

Nice post!


Evan April 23, 2010 at 7:41 AM

I love my small prosper lending account! I don’t love it enough to throw amazing amounts of cash at it, but I think it is a viable non-correlated asset even if it just has a couple hundred bucks in it ($25/month getting invested in + Reinvestment of all payback proceeds).


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